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Match Group (MTCH)

Match Group (MTCH)

In the fourth quarter, we used an earnings-related selloff to invest in Match Group (MTCH) ahead of several near-term catalysts and several long-term paths to value creation. We view Match Group, and its portfolio of brands (Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs, Hinge, Chispa, BLK, Harmonica) as a toll road on global relationship building; a blue ocean strategy in many countries with vast monetization opportunities in all countries. With any business we invest in, we look for multiple ways to win. In Match Group, we see six.

First, we believe that Match Group's valuation is depressed due to both technical and quantitative fundamental reasons. On the technical side, Match Group's status as a controlled company that is 81% owned by InterActiveCorp (IAC) creates a roadblock to an appropriate valuation. Specifically, Match Group's controlled company status and low share float prevents the stock from being included in the S&P 500 index and prevents most institutional investors from making meaningful investments. An upcoming spin off to InterActiveCorp shareholders in the second quarter of 2020 will remove this roadblock, while also providing opportunities for stock buybacks of a meaningfully undervalued equity. On the quantitative fundamental side, Match Group is underearning on today's revenues due to elevated legal costs and elevated product and marketing spend. On the legal cost side, elevated near term costs represent a two-percentage point hit to EBITDA margins that will run off in 2021. Despite temporarily elevated legal costs, Match management is acting like owners and investing in the business to build upon its lead in order to capture a large global white space opportunity ahead of the eventual monetization opportunity. Predictably, the market focuses more on backwards looking quarterly earnings as opposed to looking through to Match's proven ability to generate meaningful revenue growth.

Second, Match Group has a repeatable business model with a proven ability to create value as it expands upon several global first mover advantages. Match Group has consistently proven its ability to take an institutional knowledge of dating products to either create platforms internally or to identify and invest in local teams and then provide them with resources to create a first mover advantage that scales. A corporate office provides centralized resource sharing from operational functions (ad sales, online marketing and technology), to talent development (deploy talent to meet specific needs of portfolio companies in specific geographies expeditiously) to analytics (leverage data for product and marketing success to rapidly scale a network effect competitive advantage) to administrative functions (legal, trust, privacy, human resources, financial) to engineering resources (tech infrastructure, product localization). When it comes to a fast-growing industry where network effects matter, offering the best product that can scale quickly is of paramount importance. As we have seen from competitors, the competitive constraint is not building the dating app, it is getting the app to scale and capture network effects. Scaling a network effect driven product is difficult, and Match Group’s ability to consistently do that is a meaningful competitive advantage.

Third, Match Group is a model driven business that supports its own platform disaggregation. One thing we look for in model driven businesses revolves around their ability to apply continuously learning models to closed loop information streams. When executed well, these continuously learning models create a flywheel where the product gets better, gets more users, collects more information which enables faster adoption to user needs, which creates a better product. On the disaggregation side, platforms typically follow a historical fact pattern in which a platform develops as a mass marketplace, and as market niches develop, traffic is pulled away to the niche product focused upstarts that do a better job of servicing specific needs. With Match, we believe an opposite dynamic occurs. As niche use cases develop, Match has shown a proven ability to take the closed loop feedback mechanism to identify, cultivate, and grow products that better serve specific user needs. Dating means different things to different people. As some groups churn off mass market apps such as Tinder due to differences in demographics, geography, religion, or other specific goals and needs, Match Group uses a brand portfolio strategy in which it offers products that apply to a broad spectrum of singles. Match Group then uses superior resources and learning curve competitive advantages to incubate and cultivate concepts that feed the infill opportunity to cater to underserved segments of the singles population

Fourth, Match Group products have a user base that is underpenetrated globally and is supported by significant long-term secular tailwinds. Of the six hundred million internet connected singles in the world, sixty-five percent have never used a dating product. Over seventy percent of the countries in Match Group's addressable market are at dating app usage levels that the US and Europe were at ten years ago. As global access to high speed internet grows, and the category stigma of online dating erodes, dating app usage will look a lot closer to the ninety percent penetration level inherent in travel app usage than the current thirty percent penetration level inherent in dating app usage. When one considers that Tinder alone has quickly become a global platform enabling over one million dates per week without any localized product modifications to account for specific geographies and cultures, it is not hard to see how large the user growth opportunity is with just modest localization refinements and marketing spend to grow awareness. The vast global opportunity that Match Group has is particularly attractive in India, APAC and MENA. These regions benefit from the urban migration of young, educated, mobile internet connected rising middle-class consumers who are increasingly active in choosing their own partners. As Match Group executes on its repeatable process of building platforms, the branded portfolio strategy has a long runway to capture a meaningful share of this secularly growing market.

Fifth, Match Group has barely scratched the surface of the monetization opportunity that they have ahead of them. The low revenue flow through in relation to user trends is due to the fact that Match Group is currently in the land grab phase of the growth curve and is thus focusing on optimizing the user experience and growing users. Match Group’s proven success in product innovation (SHIP, Ablo, Super Boost, Read Receipt, We Met), provides a long runway of a la carte and consumable products across all products globally. When one considers the lengths at which rational and irrational males of all species go to accentuate their charms to attract mates (mating dances, courtship displays, plumage, large antlers, birdsong, not to mention the irrationality of humans), or that a generation of kids has grown up spending their allowances on the signaling mechanism of virtual goods in video games, can anyone rationally argue that the earnings power of a central nexus on relationship building is limited to the $0.59 ARPU on brands where Match Group actually monetizes? We realize this multidisciplinary point includes more than a bit of hyperbole, but we stand behind our research and view that customer willingness to pay is significantly higher than current ARPU, and that Match Group has meaningful room to flex pricing power across all of its brands.

Six, Match Group is likely to follow the historical fact pattern of past new technological innovation in which an application inspires infrastructure, and then that infrastructure supports platforms. As a central nexus of online dating that sits in the center of the payment flow, Match Group’s ability to extract economics while providing revenue to the suppliers of the post-match experience (event tickets, meals, drinks, grooming and beauty products, information insights) is significant.

With Match Group effectively owning the dominant toll road on dating, we are happy to buy this business at a depressed valuation relative to earnings power, with a near term catalyst and a long global runway to grow users and monetization across a highly scalable business model.

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